Fed’s QE Move Handcuffs Bank of Canada’s Rate-Hike Plan

So much for Mark Carney pulling the rate-hike trigger any time soon. With one fell swoop, the Fed’s announcement of a major new round of bond-buying has pulled the rug out from under the Bank of Canada, likely delaying rate increases north of the border for at least a year.

Mr. Carney, governor of the Canadian central bank, has said since April that he may raise borrowing costs, a course of action backed by the Bank’s assessment that the Canadian economy is running close to its potential.

But slow U.S. and global growth are dragging on Canadian exports–the trade deficit ballooned to a record high in July–and consumption is slowing as Canadians take heed of policymakers’ warnings about high household debt. That leaves business investment to pick up the slack, but businesses aren’t moving fast enough for Mr. Carney. Given all that, it’s hard to see the Bank increase interest rates any time soon.

Mr. Carney has repeatedly said he sets policy for Canadian conditions, but has also acknowledged there are limits to how much it can diverge from the Fed.

The Fed’s move “will probably forestall the Bank from doing anything,” and it’s going to be “steady as she goes” for Canadian monetary policy, BMO Capital Markets senior economist Michael Gregory said in an interview. Still, he said he can see a situation where the Bank might hike rates every once in a while, “just to fire a salvo to remind people that in a continued environment of low rates, they can and will eventually go up.”

What would it take for the Bank of Canada to cut rates? A recession, for one, or if the Canadian dollar strengthens to such an extent that it hurts the domestic economy, Mr. Gregory said. Another possibility: if the housing market doesn’t just cool but reaches a point where there’s a risk of overshooting on the downside.

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